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BPES > THE BASICS (1) > Flashcards

THE BASICS (1) Flashcards

1
Q

economics

A

the social science studying how to satisfies people’s unlimited wants with scarce resources - examines the production, distribution and consumption of goods and services and how to maximise welfare.

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2
Q

normative vs positive approach

A

normative = how should be done
positive approach - how things are done

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3
Q

finance

A

subset of economics, how to allocate resources over time and under uncertainty

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4
Q

risk

A

by definition, the future is uncertain

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5
Q

mean-variance model - modern portfolio theory

A

risk juxtaposed to return

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6
Q

CAPM

A

capital asset pricing model, what is a theoretically appropriate required return to an asset when added to a well-diversified portfolio.

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7
Q

asset pricing

A

valuing assets (value of securities)

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8
Q

corporate finance

A

how firms get funding and how they invest it

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9
Q

household finance

A

saving/investment decisions made by households

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10
Q

macrofinance

A

link between asset prices and economic fluctuations

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11
Q

market microstructure

A

price formation in asset markets

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12
Q

mathematical finance

A

novel methods and models to analyse financial problems

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13
Q

climate finance

A

incentives to mitigate/adapt to climate change and carbon pricing

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14
Q

behavioural finance

A

how psychological influences and biases affect financial decisions

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15
Q

Assumptions in finance

A

selfish agents, high returns better, low risk better, money now better than money later, security prices make supply = demand, financial innovation focuses on risk sharing and friction reduction, too many variables - models will be unrealistic

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16
Q

real asset

A

produce goods and services, generate net income to the economy and determine material wealth

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17
Q

financial assets

A

claims on real assets and hence on the income provided by the latter, each financial asset = financial liability, sums to 0. defines individual income/wealth amongst investors

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18
Q

net national wealth

A

sum of total real assets only

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19
Q

non financial firms

A

typically net borrowers, issue securities to investors and use funds to invest in risky projects, the funds can come from profit, banks, private equity, venture capital, private capital, stock market (public company), bond market(large firms)

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20
Q

households

A

net savers, purchase securities from government and non-financial firms and or depoist in financial firms /banks

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21
Q

government

A

NET borrower, through issuing bonds when taxes fall short - budget deficit sometimes saves = budget surplus

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22
Q

financial intermediaries

A

issue own securities to invest in financial assets, act as clearing houses for financial assets and liabilities bringing brorowres and savers together

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23
Q

overseas sector

A

borrow from overseas when domestic savings < domestic investment = capital account surplus

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24
Q

high liquidity

A

need to be easy to get back, small amounts low risk

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25
Q

low liquidity

A

e.g. infrastructure projects, years to get back, high risk

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26
Q

functions of financial intermediaries

A

size transformation - aggregation of small lenders and borrowers, maturity transformation - pool short term deposits to lend longer term - credit crunch risk (when everyone wants money back at same time and cannot liquidate fast enough) , risk transformation - smooth risk of lending to risky ventuires by pooling, diversifying,monitoring and hedging

27
Q

financial markets in the economy

A

information role -setting security prices, allocate capital between uses, sep ownership and control, governance and ethics

timing of consumption - financial assets allow shift consumption to real good when earn more to earn less

risk allocation - allow risk to be traded across economy

28
Q

what do financial markets achieve

A

efficient resource allocation (not necessarily optimal)

29
Q

key features of financial markets - primary vs secondary

A

initial floating of security vs trade of already existing securities on a primary market

30
Q

key features of financial markets - regulated vs alternative exchanges

A

e.g. stock changes vs more loosely regulated over the counter trading

31
Q

order driven trading

A

all trades visible to everyone centralised and direct

32
Q

quote - driven trading

A

decentralised intermediate, dealership can see what is being offered - less transparent but high reward

33
Q

bid

A

price as which market maker is willing to buy

34
Q

ask

A

price at which market make is willing to sell
bid < ask

35
Q

liquidity

A

ability to trade a security fast at price close to fundamental value

36
Q

depth

A

maximum order size that can be executed without affecting security price `

37
Q

brokers

A

find buyer/seller counterparty
earn comission

38
Q

dealers

A

counterparties for buyers and sellers,
earn bid/ask spread

39
Q

exchanges

A

automated - no need for brokers + dealers

40
Q

equity market

A

flow of funds

41
Q

bonds

A

intruments constituting a loan made by buyer (lender) to issuer (borrower)
fixed - income

42
Q

bonds - loan today

A

purchase price (usually below face value)

43
Q

bonds - coupons

A

interest payments

44
Q

bonds - principle/face value

A

payment due back at maturity

45
Q

government bonds

A

semi-annual coupons (collected every 6 months)
normally considered riskfree
interest rate contingent on maturity
treasuries, gilts (coupons adjusted for inflation)

46
Q

corporate bonds

A

different repayment priorities
higher yield than government bonds
variation in risk

47
Q

yield

A

interest rate that makes current price fair

48
Q

stocks

A

ownership of a share in a business, entitles shareholders to dividendsva

49
Q

value of of stocks

A

present value of future dividends and liquidation value or expected present value of future cashflows frmo business projects after paying off creditors

50
Q

debt

A

not an ownership interest, creditors do not have voting rights
interest is considered the cost of doing business and tax is deductible
creditors have legal recourse if interest or principle payments are missed, FUTURE CASHFLOW IS OFTEN KNOWN

51
Q

excess debt

A

financial distress, bankrupty, agency debt issues

52
Q

equity

A

ownership interest, common stockholders vote for board of directors and other issues, dividends are not considered cost of doing business and are not tax deductible, dividends are not a liability to the firm and stockholders have no legal recourse if dividends are not paid
all equity firm cannot go bankrupt and FUTURE CASHFLOW IS STOCHASTIC

53
Q

EQUITY INDICES

A

Dow Jones - price weight
Standard and Poors - value weighted
FTSE 100 - value weighted

54
Q

futures

A

contractual agreement to exchange a security for a specified cashflow on a future date

55
Q

swaps

A

a contractual agreement to exchnage two sets of cashflows over a specified time period

56
Q

forwards

A

Non standardised contracts to exchange a security for a specified amount on a future date

57
Q

convertibles

A

debt instruments that convert into company equity under certain condition

58
Q

options

A

instruments that give one party the right to buy or sell the underlying security

59
Q

asset-backed securities

A

instruments collateralised by an underlying pool of assets such as mortgages, receivables, life insurance policies and loans

60
Q

cash funded transactions

A

through bank account/cheque

61
Q

margin funded (bull)

A

more funds -> risk of losses and value fluctuations could lead to forced sales - have to provide at least 50% - buying from a broker and maintenance margin at least 30%.
margin =( value of security - loan) / value of security = equity/value of security
security prices expected to rise by investor

62
Q

short selling (bear)

A

With short selling, a seller opens a short position by borrowing shares, usually from a broker-dealer, hoping to buy them back for a profit if the price declines. To close a short position, a trader repurchases the shares—hopefully at a price less than they borrowed the asset—and returns them to the lender or broker
inverstor expects security prives to fall

63
Q

equity

A

ownership interest in a company

BPES (8 decks)

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